Hello Amit, the way a lender calculate penalties varies between lender to lender and it’s really a big unknown to most clients, which may eventually lead to sticker shock when they want get out of their mortgage. For example, on a current balance of $250,000 on a five-year fixed rate mortgage at 3.29% and three years into your term (with two years remaining), the penalties to break the mortgage can range from $2,000 to $10,000 depending on what method the lending institution uses to calculate penalty.

This has finally started to change. Thanks to Federal Finance Minister Flaherty 2010 budget, which had called for better disclosure of how mortgage penalties are calculated, lenders have started spelling out their penalty calculations in more detail.

Some of the methods to calculate mortgage penalties can be Standard Interest Rate Differential (IRD) Penalty, The Discounted Rate IRD Penalty or The Posted Rate IRD Penalty. Consumer needs to understand that his/her lender is simply looking at maximising lending institution’s profit. Unlike a mortgage broker, who works for the borrower and not the lender.

About Vikram Gupta

After having worked as a Mortgage professional for President Choice Financial/CIBC for 10+ years, Vikram has now joined as a Mortgage Agent with MonsterMortgage.ca (license #10516) and can be contacted at 416-953-0516 for all your mortgage needs.